NYT Reports States Looking For Ways To File Bankruptcy, Muni Bondholders To Be GMed

Tyler Durden's picture

A few days ago we reported that Newt Gingrich was pushing for legislation to allow states to file for bankruptcy, "allowing Them To Renege On Pension And Benefit Obligations." As we speculated back then "obviously what this means for equity investors in assorted muni
investments is that a complete wipe out is becoming a possibility, as
Meredith Whitney's prediction, which everyone was quick to mock and
ridicule, is about to come back with a vengeance." Sure enough, this most recent development in the states' path to insolvency was quickly ignored as it was not a dipping mushroom cloud that could be bought. Until tonight: the NYT has just rehashed the post in an article that would not only validate the Whitney thesis if true, but make a Cramer-Bove out of everyone who has been caught on tape in the past two weeks kicking and screaming that there is no chance in hell the carnage predicted by the scourge of Citigroup (and yes, back in 2007 everyone said that Citi could never fail either). From the NYT: "Policy makers are working behind the scenes to come up with a way to let
states declare bankruptcy and get out from under crushing debts,
including the pensions they have promised to retired public workers." Which means that up to $3 trillion in muni debt has a high probability of being GMed, precisely as we predicted: "proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid." Oh, and since all this constitutes an EOD, readers are strongly urged to re-read the primer on what pervasive state bankruptcies will mean for muni CDS (hint: the MCDX is cheap).

From tonight's NYT:

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

But... but... the Paul Krugmans at the CBPP just said that not only do states need more debt, but their pension funds are sure to generate 8% returns. In perpetuity and then some.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

So basically, GM? Thank you Steve Rattner.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.

You can read the rest here. It is pretty self-explanatory.

Fast forward to 2013 when Goldman of American PIMCO Lynch, Jefferies Stanley Tabak, BlackRock Morgan and Citibank of Rangoon all win the mandate to IPO the government's $100 billion stake in the bankrupt state of California, preceded by a 10,000% 5 day market melt up in which every single short share in the world is recalled by State Street. And the official spin by the Palin administration: "this is a huge stamp of approval and confidence by the communist capital markets in the capability of Brian Sack's solitary Bloomberg terminal to manipulate each and every asset price to levels not even Jim Cramer ever thought possible."


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kujo's picture

Most states like their access to the capital markets.

goldmiddelfinger's picture

Truly! And they'll get it when the old mountain of pain is obliterated and fresh money can see a better credit. Sorry GM bondholders.

kujo's picture

A state defaults and it will break the entire muni market. The Fed steps in long before that happens.

goldmiddelfinger's picture

If by "Fed" you mean FRB, Bernake just said publically that the states could fuggitaboutit. Whether that's just a bald faced lie for the public trough, a bad cop play-act for the Shi-town SEIU, well maybe that's another story.

kujo's picture

If a state were to default on a GO bond, the term full faith and credit would mean nothing. How would the market look at full faith and credit of US Gov't debt. The FRB and the Treasury dept cannot allow this to happen. Benny will step in.

Alienated Serf's picture

umm, full faith and credit of the UNITED STATES, i.e. the federal government.  not individual states.  arkansas defaulted in the '30s

Sudden Debt's picture

Arkansas defaulted in the 30's, restarted and was good for another 80 years.




And all will be well for another 80 years. Oke, maybe not 80 but at least 10 years!

And by cutting the pension the slightly older people >60<99 can go back to work AND ENJOY THE FRUITS OF HARD LABOR!!

you know, give them back their meaning of life and shit.


What amazes me is that the American people is so in to this!

Here in Europe we would have riots and would want the things we paid for our entire life BUT NOT IN AMERICA!! UNCLE SAM FIRST! That's what I call patriotisme. WAW!

If you didn't do anything over here in Europe when that would happen, we would call you a mindless nogood motherfucker and throw you from a bridge. But that's just us "crazy" europeans :)


Bob's picture


There's something sadistic in the American character that has never yet been confronted.  Perhaps it's a primitive characteristic of an empire that, unlike the European nations, has never been meaningfully humbled.  My hope would be that an American comeuppance like those Europeans suffered in previous centuries will temper our Noble Bully mentality with some of the empathy that is so painfully lacking in our culture.

At this point, however, we appear to be a warrior society that still values the number of scalps hanging from our loin cloths--the more people you screw over, the greater your status.  Compassion for the needy is weakness and fairness is reserved for those with the power to impose their version of it upon as many people as possible.  

Oh regional Indian's picture

 My hope would be that an American comeuppance like those Europeans suffered in previous centuries will temper our Noble Bully mentality with some of the empathy that is so painfully lacking in our culture.

Well said bob. It is much needed.

The thing is though, that de-sensitization is entirely at the hands of the media.

Three Stooges/Charlie Chaplain/Laurel and Hardy Slap-stick all the way to Jackass and reality TV.

Now violent video games, UFC on TV..... ice-hockey (total blood sport)...

No one to blame but the bastards at Tavistock and the like and Bernays and his descendants, Disney......





Bob's picture

I'd like to blame the media, and they certainly don't help, but I think the humility and humanity that are part and parcel of real maturity must be learned the hard way. 

You've got to fall to develop a genuine respect for gravity.

Oh regional Indian's picture

You've got to fall to develop a genuine respect for gravity.

Nice! I'll take that into my quote-book!


ToNYC's picture


MS Windows and individual States share the need to reboot. Their memory allocation or deferred entitlement obligations are strewed about, haphazardly comes to mind, in political expediency. When these streams collide, system communication is compromised and nothing gets done. Without the ability to add more RAM memory or money printing; the only success comes with a reboot of the system.

Frederic Bastiat's picture

Kujo, that exact thinking got us here.  The world won't end, it will just suck for a while.  If we don't do it now, it will suck even more later.  

jm's picture

Respect Kujo's point.

Only a stupid state thinks that a default is a debt jubilee. It is not.  It is welcome to the jungle.  The only way they can borrow is with a brand new credit spread that prices them out of the market.  They will have to pay everything out of revenue.  It is impossible to keep even a skeleton of existing services funded this way.

What states will have to do is get real and manage the painful realities of their past excesses.  This means taxes are going up and services are going down.  Look at Illinois, Jersey, pretty much everywhere.  They are managing the situation now (more needed) by cutting services and soon pension funding, before it all blows up.  Default is the blow up.


MachoMan's picture

So what is stopping a federal body from intervening post default to fill the gap in credit availability/spread?  This presumes that there is somehow a functioning credit market that in some remote sense of the word is capable of accurately apportioning risk.  Upon default of the federal government, I suspect you will be more correct than at present with regard to the states.

It's going to be a game of good cop, bad cop and the shoes are going to be all over everyone's respective feet.  As of now, states play bad cop and reneg on everything.  Uncle sugar comes in as a knight in shining armor and allows them to begin borrowing again (because default risk is irrelevant and, being the federal government, it can ensure that the state may not default on its debt to the federal government).  This way, the support required for each state by the federal government will be substantially less.  (now whether they pick it back up in required welfare, etc. is another question, but I suspect the aggregate result will be a substantial reduction in the amount of outlays required by uncle sugar). 

Then, when it's the federal government on the chopping block, and we get sick of the pains of austerity, we will simply choose to repudiate the debt.  What happens to our future capacity to borrow is largely irrelevant given the likely public sentiment at that point (i.e. we won't care).  It is simply a predicament we have placed ourselves in through decades of abuse and, presuming we even make it that far, we will stop the madness through repudiation.

Once states topple like dominoes, it's going to be easier for fed.gov to do so as well.  Likewise, as more and more countries topple, it's going to be easier for fed.gov to do so...  good cop one day, bad cop the next...  just depends on which side of the billy club you're on.  Domestic default first, then international default.


jm's picture

Thanks.  Let me ponder this.

jm's picture

If this were a $3 trillion default mass, I would agree, as there is no other option. 

But all they are doing is kicking the can down the road, hoping they heal.  Thus they are focussed about the roll, which a QE^(2x) can handle.

Also... default may impact T spreads adversely, in the sense that credit risk reflects default realities.  Even though T are reference, that reference rate could go up, which would fook everything in so many ways. 

MachoMan's picture

This really doesn't address the substance of my post.  The FED is already monetizing the debt.  The question is why do rates not reflect this relationship and why has our default (certain for everyone who can do basic math) not been accurately represented in financial instruments? 

Again, you are presuming there is some real market out there.  What I am telling you is that it has been dead for some time and we are presently defying gravity.  What is stopping us from continuing to do so?

I am in total agreement that municipal, state, and federal debt are all ultimately doomed and so is the dollar.  However, I disagree that anything would necessarily coincide with another federal bailout.  I simply do not have the means to determine when the levee breaks and I sincerely doubt you do as well.  [I have a sneaking suspicion we're not going see coming what ultimately spells our demise].

Jerome Lester Horwitz's picture

Yes, Illinois raised taxes but the Democrats in charge are going to also increase spending and are not cutting pensions at all. Illinois is a poor example to use. The only thing that the politicians in Illinois are managing is borrowing and spending this state deeper into debt and chasing businesses out of Illinois with their high tax rate. But hey, the unionized government employees will be taken care of. The Democrats that control this state could care less about the private sector!

Marc45's picture

While those with a bearish bent may salivate at the prospects of state defaults a la bankruptcy, there ain't no way in hell that will happen. There is simply too much at stake to play that game. It would change everything.

goldmiddelfinger's picture

The game is engaged. Read the Times article and yes it would change everything. Is it your position that change cannot happen?

bankonzhongguo's picture

Who do you think is ADVISING the states on their pension investments and alleged returns - the Banks - who want to be in first position forever and can have their lobbyists just write the new laws for congress.

If a Corporation can void their pension obligations a la PBGC and have Uncle Sugar payout at 30 cents on the dollar after discounts, then good folks like Reid and Gingrich are more than happy to help craft some pro-bank laws that allow the states to stick-it to state pensioners and other annuitants.

The muni market will just need to pay more interest for the courtesy risk.  These are the same fake conversations already had in every post war banana republic.

Also, think of the coming medical bills coming from Obamacare in 2014 for the states.

The general economy has collapsed 30% because the credit magic is gone and all the manufacturing has disappeared - all that state tax revenue is bye bye. Pensions will go bye bye also.

The States must GM the pensioners.

What's Ken Feinberg doing?  He's so wise and kind. 

Hard to be politically active when you can't afford to bribe your "representative" on a fixed income.



Oh regional Indian's picture

Marc, 10 years ago, everyone would have scoffed at a person who claimed that the US Debt in 2011 will be nearly 14 Trillion fiatscos.

Likewise someone in 1912 saying that in the next six years, 16 million humans would die at the hands of fellow humans. In the defense of no particular threat of ideology except that indoctrined into the population. 

Likewise the bomb in 45.

I think the gist and the gestalt of this time is one of dis-continuity.




Guy Fawkes Mulder's picture

Not nit-picking at your point even one iota but:

Not "everyone" would have scoffed. The animal farmers weren't scoffing during those times. They were planning and preparing for it.

I wonder what they plan and prepare for today.

bigelkhorn's picture

This is amazing. I am scared right now about an economic collapse as my house is about to foreclose. I am nearly in tears, and stressed.

My friend and I subscribe to the FFT newsletter the guy over at http://forecastfortomorrow.com He predicted the stock market crash, and the US collapse ages ago, and many other things, it is spooky how accurate he is. and what he says coming next is int resting, he is well worth a look. Time to prepare was yesterday people!!

ZackAttack's picture

I think you are correct. Hell, the federal government backstopped ABCP used to lever up to buy SIVs. It backstopped bank debt. It implicitly backstopped GSE debt. Muni debt is one step away from 'full faith and credit.'

I think the trade will go down exactly like the banks did - there comes a point where you have to hold your nose and buy the smelliest Detroit GO bonds.

Pulling out the charts, though, to 2 - 3 years, I don't see any reason that couldn't happen another 50% down from here.

Michael's picture

I made a few new Youtube videos.

Congressman Steve Cohen AKA Nathan Thurm


Jesse Ventura Police State Fema Camps Remix


The Precautionary Principle Who Benefits?


I think I need to buy a gun's picture

Do not be in dollar denominated debt. This is now old news....next up fannie and freddie and what will happen with everyones mortgages......


Peter schiff circa 2007 "The only thing left will be the debt we owe to foreigners"

President Palin's picture

Peter schiff circa 2007 "The only thing left will be the debt we owe to foreigners"

Nah, we'll find a way to screw them over too...

nmewn's picture

"Nah, we'll find a way to screw them over too..."

They should have used protection...LOL.

When party two buys party one's debt they are assuming risk by virtue of the fact that party one had to ask for a loan from someone to begin with...they just chose their partner poorly...now they have an uncomfortable burning sensation...but life will go on.

I don't know why I'm writing like this...maybe your avatar? ;-)

tired1's picture

Party two can use the debt instrument to acquire real assests before the music stops.

nmewn's picture

Probably so...and the beat goes on.

I think I need to buy a gun's picture

But uncle ben just said recently the "Muni bond market was functioning normally"

cswjr's picture

Lol, your last paragraph is brilliant.

plocequ1's picture

Oh leave me alone. I have no pension, No 401k, No nothing. Just a loaf of bread, A jug of wine and thou.

Hephasteus's picture

But I find your tongue in cheek musings rather interesting.

Xibalba's picture

I'm sure this is why futures went green. 

DoChenRollingBearing's picture

Hard to find "safe" investments nowadays.

Best buy some physical gold and silver right away!

goldmiddelfinger's picture

Take a long, hard look at your annuity provider. They just escaped the net last time. Cats they ain't.

DoChenRollingBearing's picture

Please note I said buy SOME gold and silver!

I am a fairly raging gold bull, but I am on the verge of halting my gold purchases (along with some Ag, Pt and Pd I bought awhile back) because I have reached 9% of my wealth in gold (10% in total PMs).

EVERYONE should be diversified!  Sure, have some stocks, bonds and cash (FRN$ under the mattress).  I myself have an investment in a company in Peru as well as a variety of other assets.

You do NOT have to go "all in" on gold!  But, it seems really unwise not to have a good chunk of your assets in the best wealth protection investment in town.

quasimodo's picture

Always makes my day when I can sit here and hit refresh and your junks keep adding up

Eternal Student's picture

I have to respectfully disagree with the suggestion that gold and silver are safe. IMO, there are no safe investments. Your best bet is to be flexible and aware. And yes, I own PMs. But safe? Oh no. Let me count the ways.

The safest bet seems to be paying attention to the news on ZH.

RafterManFMJ's picture

A Kel Tec KSG and a garden...all you need

ColonelCooper's picture

Practical and impractical all stirred into one pot.  Cool

Calmyourself's picture

RMF, check the latest reviews.  The trigger goes dead as you rack it design flaw BIG time..  870 or Mossie 500/590

TWORIVER's picture

Seems like all those losses should lead to selling in all assets. Don't think Gold and Silver will be immune.

mouser98's picture

PMs are not investments, they are real money

goldmiddelfinger's picture

Sure "they" are. Ever ask yourself how Santa gets in when there's no chimney?